Nutrien Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 17 speakers on the call.

Operator

Greetings, and welcome to Nutrien's 2023 Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow after the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jeff Holdsman, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning and welcome Nutrien's 2nd quarter 2023 earnings call. As we conduct this call, various statements that we make about future expectations, plans and prospects contain forward looking information. Certain material assumptions were applied in making these conclusions and forecasts. Therefore, actual results could differ materially from those contained in our forward looking information.

Speaker 1

Additional information about these factors and assumptions are contained in our quarterly report to shareholders as well as our most recent annual report, MD and A and Annual Information Form filed with Canadian and U. S. Securities Commissions. I'll now turn the call over to Ken Seitz, President and CEO and Pedro Farrar, our CFO for opening comments before we take your questions.

Speaker 2

Good morning. Thank you for joining us today as we review our Q2 results and the outlook for our business. Fertilizer industry has gone through a period of unprecedented volatility over the past 18 months, driven by a series of unique events. However, we are encouraged by the continued improvement in demand as the year has progressed. This is most evident in North America, where we had a strong spring season, Relative fertilizer price stability and a significant reduction in channel inventories.

Speaker 2

The positive sentiment is carried into the second half With solid customer engagement on all fertilizer products. The process has been slower in certain offshore fertilizer markets with a lack of consistent buying, Requiring Nutrien to maintain a flexible approach and focus on controlling what we can control. The strategic actions we announced yesterday reflect our commitment disciplined capital allocation and a focus on initiatives that enhance free cash flow through the cycle. Before I speak more about the outlook Specific actions we are taking, I will turn it over to Pedro to review our Q2 results.

Speaker 3

Thanks, Ken. Our Q2 performance illustrated the contrast between how the market has progressed in North America compared to certain offshore markets. Nutrien delivered adjusted EBITDA of $2,500,000,000 in the 2nd quarter and $3,900,000,000 through the first half of the year. This represented the 2nd highest earnings total for both respective periods, but was down significantly from the record prior year due to lower Strong grower demand in North America and the relative stability of our business in Australia. North America retail crop nutrient margins largely normalized as Higher cost inventory moved through the channel.

Speaker 3

Sales volumes were up 16% compared to the prior year and would have been even higher If not for the extremely dry conditions throughout the U. S. Midwest, we ended the quarter with fertilizer inventories at a multiyearlow, Down more than 40% from the prior year. We expect this is generally indicative of retail inventory levels across North America, Setting up the potential for large purchasing requirements in the second half. Crop Protection gross margins impacted in the quarter by lower prices for certain commodity products, higher cost inventories and reduced demand as a result of the dry conditions in the U.

Speaker 3

S. Midwest. We recognize a non cash impairment primarily related to the goodwill of our South American retail business. This region has been impacted by volatility in crop input markets and a sharp increase in local interest rates among other macroeconomic factors. The long term prospects for agriculture in South America remain strong and we see opportunity for future growth.

Speaker 3

However, in the near term, We are pausing additional investment in this region until there is further market stabilization. Now turning To our fertilizer segments, they were impacted in the quarter by lower benchmark prices compared to the exceptionally strong period in 2022. In potash, we increased sales volumes in North America and achieved relatively stable pricing compared to a trailing quarter. This outcome was in line with our expectations. Offshore demand was weaker due to a lack of consistent engagement in spot markets In a delayed contract settlement with China, our offshore net realized price was impacted by lower benchmark prices Additional logistical costs associated with an unplanned outage at Capotec's export terminal in Portland.

Speaker 3

North American nitrogen prices were down from the prior year, but strengthened during the quarter as supply tightened following the start of the screen application season. Global ammonia markets were pressured by lower European gas prices and weaker industrial demand. 2nd quarter nitrogen sales volumes The performance of our supply chain and order book positioning allowed us to capture incremental value associated with the in season that emerged in North America during the quarter. Phosphate benefited from the strength of industrial and feed product lines, partially offsetting the impact of lower fertilizer prices. We completed maintenance and reliability initiatives And are targeting utilization rates above 90% in the second half of the year.

Speaker 3

During the quarter, We recognize a non cash impairment charge to our White Springs phosphate assets. This facility has a short mine life In our Aurora site, therefore, near term fluctuations in fertilizer prices and margins have a greater impact on carrying value of its assets. Under IFRS accounting, this has resulted in the recognition of both impairment losses and reversals in recent years. To summarize, our first half results were below the record prior year. However, we saw a number of positive market developments, in particularly North America, They provide opportunities for Nutrien as we look forward to the second half of twenty twenty three and beyond.

Speaker 3

Now I'll turn it back to Ken.

Speaker 2

Thanks, Pedro. I will start with the outlook for the business and our updated full year guidance assumptions. Weather and geopolitical challenges continue to prevent a replenishment of global grain and oilseed supply and is providing support for ag commodity prices. North American Crop Development is tracking ahead of the historical average pace, which could support an early harvest and Extended fall application window for fertilizer. The combination of low channel inventories and prospects for a strong fall season Has contributed to increased demand for all fertilizer products in the 3rd quarter.

Speaker 2

We had a very positive response to our North American potash fill program And I've closed the order book for 3rd quarter deliveries with a targeted $30 per short ton increase for the 4th quarter. Turning to Brazil, where growers have purchased a lower than normal proportion of inputs for their upcoming spring planting season, which we anticipate will lead to solid demand over the next few months. Brazil fertilizer prices have strengthened in recent weeks With potash prices up around 10% since early June. We expect Canadian potash exports will be constrained in the Q3 by logistical challenges related to the strike at the Port of Vancouver and the outage at Capitex's Portland Terminal. It could take several more weeks Nutrien's full year adjusted EBITDA is now projected between $5,500,000,000 to $6,700,000,000 As disclosed in our news release on July 11, The revision largely reflects factors impacting offshore potash sales through Canpotex and lower offshore realized prices than previously anticipated, including the impact of higher logistics costs.

Speaker 2

We reduced our potash sales volume guidance to a range of 12,600,000 to 13,200,000 tons And have adjusted our production plans accordingly. We lowered our nitrogen adjusted EBITDA guidance range slightly due to a driven by low inventories and ongoing production curtailments. Our revised retail guidance reflects greater margin pressure in South America As we sell through higher cost inventory and the impacts of dry conditions in North America during the growing season. We expect a strong fall fertilizer application season and per ton margins above historical average values, which is in large part due to growth in our proprietary nutritional products. Based on the change in projected earnings and cash flow for 2023, We are indefinitely pausing our potash ramp up following the completion of in flight projects in the second half.

Speaker 2

These projects are primarily related to the procurement of new mining machines that support further automation of our fleet. We will maintain operational flexibility in our potash business, preserving the ability to quickly respond to changes in the market, while ensuring we maintain our low cost position. We have also made the decision to suspend work on our Geismar clean ammonia project And to defer the timing of capital spend on select brownfield expansions, we previously stated that investment decision on our Geismar project was contingent on obtaining a greater degree of certainty on capital cost estimates. And as engineering work progressed, we have seen some escalation in costs. Therefore, at this time, we expect to have higher return alternatives for our capital.

Speaker 2

We believe emerging uses for clean ammonia will provide a long term growth opportunity for the nitrogen industry, But there continues to be uncertainty on the timing of this demand. We will monitor how this market evolves and evaluate future options with the objectives of preserving value and optionality for the project. In retail, we are reducing expenditures across a number of smaller investment projects As we prioritize capital across the business and maintain flexibility on future allocation opportunities, The focus of the retail team will be to integrate recently acquired businesses in Brazil, drive supply chain and operating efficiencies and enhance the free cash flow generation of the business. In aggregate, these initiatives are expected to lower our 2023 capital expenditures by $200,000,000 and reduce associated capital by $2,500,000,000 to $3,000,000,000 over the next 5 years. We have also taken measures to reduce operating expenditures by approximately $100,000,000 in 2023 to offset supportive of higher average fertilizer benchmark prices through the next cycle.

Speaker 2

This view is driven by the expectation for continued tightness in global crop markets, Higher energy prices and other inflationary impacts on the global cost curve. Based on the changes For potash, we assume a return to trend line global demand growth and nutrient sales volumes in the range of 14,000,000 to 15,000,000 tons. We now expect a mid cycle adjusted EBITDA scenario in the range of $7,000,000,000 to $7,500,000,000 which is highlighted on Slide of our Q2 earnings presentation along with the comparison to our previous mid cycle assumptions. In closing, we expect to generate strong cash flow through the cycle and are committed to a balanced and disciplined approach to capital allocation. We will leverage the advantages of our integrated business and continue to position the company to serve the needs of our customers and deliver long term value for our shareholders.

Speaker 2

We would now be happy to take your questions.

Operator

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. Your first question Comes from the line of Joel Jackson from BMO Capital Markets. Your line is now open.

Speaker 4

Hi, good morning. So, given we talk about potash capability, so now that you've bought deferred adding more machinery and people, What is the maximum potash production that you will be able to produce this year and next year, so run rate? And then maybe balancing out one of your competitors, Your Capitex partner suggests that potash demand, potash shipments will not get back to 70,000,000 ton level until 2025 And they base that on a lot of supply constraints. You have excess supply that you could run if you wanted to. So a bit of confusion over How much of that is a demand story, getting back versus constraints out of Belarus?

Speaker 4

Can you talk about your sort of Your own views on that story on that team? Thanks.

Speaker 2

Yes. Good morning, Joel, and thanks for the question. So yes, for 2023, We based on some of the challenges shipping Canadian potash, we reduced total global shipments to 63,000,000 to 65,000,000 tonnes and we This year as you've seen 12,600,000 to 13,200,000 tons. Next year, our customers were calling for 15,500,000 tons. We would be able to So by the end of this year, as mentioned in the commentary, we'll have procured mining machines, we'll have completed in flight projects and Have the ability to meet customer needs to that level.

Speaker 2

As it relates to the return to historical trend line demand in Potash, when we talk about our new mid cycle, it's in that 70,000,000 to 75,000,000 ton range. And our assumptions are getting back that sort of level over the next few years.

Operator

Your next question comes from the line of Steve Hansen from Raymond James. Your line is now open.

Speaker 4

Yes. Good morning, everyone. Thanks for the time. Just wanted to follow-up on the potash expansion strategy Or at least the halting of it. Can you give us a rough sense for the capabilities after the in flight projects are completed?

Speaker 4

I'm not sure if that was delineated Exactly. And then as we think about sort of the year over year improvements in export capabilities, both in Vancouver And in Portland, how do you feel about moving the amount of volumes that you're talking about here into next year? You still feel confident that that's doable? Thanks.

Speaker 2

Yes, Steve. So when we talk about sort of global Trend line demand of 70,000,000 to 75,000,000 tons and our new mid cycle assumption for Nutrien of that 14000000 to 15000000 tons and allowing our Some surge capacity to flex into the market when customers are calling for it. That's what we're planning for this. Customers are calling for 15,500,000 tons next year. We would be able to supply into that having completed this year our in flight projects In expanding some potash capability.

Speaker 2

So it's in and around that range. As it relates to export capacity, I mean, we have expansion capability in at Neptune, we have some expansion capability. This is all via Camptex at Portland. So we have line of sight across at least certainly our 5 year plan to be able to ship potash into a market that's growing. Hence, our plans around the new mid cycle.

Operator

Your next question comes from the line of Andrew Wong from RBC Capital Markets. Your line is now open.

Speaker 4

Hi, good morning. Thanks for taking my questions. So in that mid cycle adjusted EBITDA scenario, can you talk about what you You either are assumed for retail, obviously, it's been under pressure for this year, but we also saw a very high number last year. What would you consider as a normal run rate or maybe put another way, what would retail look like this year under normal conditions? And then just secondly on Retail SG and A, it is down a little bit this year, but not down as much as what the overall segment profitability was.

Speaker 4

So The operating coverage ratio has gone up. What's your expectation on how that trends going forward? Thank you.

Speaker 2

Yes. Thanks, Andrew. As it relates to our retail assumption for mid cycle earnings, yes, last year was an interesting year in terms of Margins being quite strong and then obviously talking about the reset for 2023, which We're experiencing and we're experiencing that really across our retail business and probably more than anywhere in Brazil with volatility we've seen there. But our assumption prior to this current view of mid cycle and as we've Describe it in Slide 18 of our presentation, our assumption was $2,100,000,000 out of our retail business and we're announcing about 1.9 $2,000,000,000 when margins do normalize to So it's $1,900,000,000 to $2,100,000,000 is our assumption. Jeff, maybe I'll pass it over to you To talk about Andrew's question regarding SG and A.

Speaker 5

Yes, Andrew, thanks. When we look at SG and A and we look at This year on a year over year basis from that perspective, a lot of our increased cost have come from standpoint of our expansion into Brazil. And 60% of our cost in a sales and customer focused organization Comes with people and people are our largest cost. And so we've obviously seen some wage inflation in that area. But with that said, we started early in the year taking some very targeted actions this year to reduce headcount where it isn't absolutely essential.

Speaker 5

In particular, we're very focused on reevaluating our organizational needs in Latin America to ensure that we have the right scale to operate efficiently And properly for the size of our current operator. Ken mentioned in his comments and I think Pedro as well that we've been very deliberate about controlling our controllables And we're taking out discretionary cost across our network. If you look at it on a percentage basis, we managed to hold our cash expenses below 10% of revenue The quarter, which is actually just slightly better than last year despite an overall reduction In revenue and in dollar terms, adjusted cash expenses are down year over year on a year to date and quarter basis. So That's something I'd like to think that we're doing continuously in controlling our controllables and we're certainly going to put a lot of effort on in the back half of the year and going forward As we continue to drive efficiency in our organization.

Operator

Your next question comes from the line of Christopher Parkinson from Mizuho. Your line is now open.

Speaker 6

Great. Thank you so much. So when we take a step back and just look at the potash markets with the recently signed Chinese contract and A little bit of rebound in Brazilian spot. And it seems like Southeast Asia is a bit out of whack and due to recent declines over the last, let's say, 4 to 6 weeks. At what point in time would your team or Canpotex expect a fairly robust Demand response, obviously, there are a bunch of other moving factors, inventories, weather, crop outlooks, so on and so forth.

Speaker 6

But In terms of the eventual rebound of the potash market, how is your team currently thinking about that as a response to lower prices? Thank you so much.

Speaker 2

Yes, great. Thanks, Chris. And so you're absolutely right. We have seen sort of illiquid trade in Southeast Asia for some time for standard grade potash. Part of that was held up by drawing down inventories, part of it waiting on the China contract and setting that benchmark.

Speaker 2

But here we are. So maybe I'll hand it over to Mark Hutch to provide some more detail.

Speaker 7

Yes. Thanks, Chris. Good morning. So look, I think 1st, above all else, I would just say we're very encouraged by the continued stabilization and recovery of demand, particularly in North America and Brazil, which are obviously really important markets for Nutrien. So I'll just maybe say a few words about North America and then talk internationally as it's all Part of the bigger picture here.

Speaker 7

So as you heard Ken say in our commentary, we saw a record Q2 for domestic sales and Really strong and rapid customer engagement as spring activity unfolded in the U. S. As we talked previously, Q2 was more a just in time basis. But following Q2 in North America, we really did see Most of our major customers with inventory levels that were at least at multiyear lows, if not the lowest levels they've ever had So you've got an attractive crop price backdrop, the potential for early fall activity and this really has set up for what we've seen be Exceptionally strong fill program that we've just laid out. As Ken said, we saw really strong demand.

Speaker 7

In fact, We call it overwhelming demand for customers on the fill. We closed the order book on Q3 at the $3.70 per short tonne level And have upped our reference price for Q4 by the $30 per short ton. And in fact, just in the last 24 to 48 hours here, we've seen customers come back for some Small volumes and transacted at that $400 per short ton level in the Midwest. So we're encouraged by what's going on in North America. I think moving internationally, just to talk about a couple of the markets that are important to Canpotex, all of which you mentioned.

Speaker 7

Let's start with Brazil. Brazil really has led the demand recovery internationally. It's been the strongest overseas market since the signing of the Chinese contract. I think there was an anticipation That contract would put a floor under some of these markets and we've seen that in Brazil from a low of 310 or 320 around the time of the contract to today, The industry publications would call the market 350 to 360. And as Ken said, the pace of crop input demand we think is a little behind last year.

Speaker 7

So that sets In China, with the signing of the contract, we actually saw good shipments in the first half of the year into China and the contract has kept those moving. So as you would have seen in our materials, we've upped our demand estimate for China this year to 15,000,000 to 16,000,000 tons, and We've seen strong consumption domestically in nitrogen and phosphate, and we also think that bodes well for shipments into China in the second half of the year. So again, Consumption in China looks on track. The other important market to Capitex, as you mentioned, is Southeast Asia. And Southeast Asia is the market That has been a little more varied and more protracted in its recovery versus other markets.

Speaker 7

This was likely due to a few factors in view, one being the delayed timing of the Chinese contract, buyers wanting to see some stability in global benchmark pricing and then some volatility in Palm oil pricing and key crops. Just in recent weeks, we have seen some signs of demand reemerging in those markets. And even within Southeast Asia, it's a mixed picture. So in markets like Vietnam and Thailand, We've seen prices anywhere from the $3.30 level up to almost the $400 level with more stability. And I think Indonesia and Malaysia are taking a little longer to But we do see demand picking up in Q4.

Speaker 7

And Chris, as we move into 2024, we would expect some recovery and stabilization In Southeast Asia, generally. So as I said to start in my comments, I think we're generally encouraged by the direction of the potash market and the rebound in demand.

Operator

Your next question comes from the line of Ben Isaacson from Scotiabank. Your line is now

Speaker 4

Thank you very much and good morning. One more on the potash expansion, if I may. So I actually really like it. I think it's a good move to pause the potash expansion, but I don't fully understand the decision making process. When But I don't fully understand the decision making process.

Speaker 4

When you talked about a strong Q2 in North America, Brazil is starting to come back, But that's all short term in this year. And even if there is weakness, you're dealing with it by curtailing your production. When we think about long term, Structurally, nothing has really changed. The demand growth trajectory is the same. We haven't seen any meaningful change either Belarus or Russia.

Speaker 4

BHP is So what actually has changed from a long term outlook to PAW's increasing capability to 18,000,000 tons. And if I can just sneak in a clarification question. You took a $400,000,000 to $500,000,000 impairment on LatAm Retail. And one of the things you referenced was moderating long term growth assumptions. Does that change your strategy in Brazil retail in terms of Your investment spending over the next 2 years?

Speaker 4

Thank you so much.

Speaker 2

Yes, great, Ben. Thank you for the question. And I'll maybe say a few words on the potash piece and hand it over to Mark and Jason to expand on that. But we do see demand to sort of trend line return to trend line growth in demand in potash. It's at 2.5%, 3% average annual growth rates and again returning to that 70,000,000 to 75,000,000 ton range over the next few years.

Speaker 2

And if you look at the market share that we've picked up over the last and expect to maintain that has us at that mid cycle of 14000000 to 15000000 tons. There still Continues to be quite a bit of uncertainty on the supply side of the equation. And the reality is that while we have seen Russian and Belarusian volumes coming out of the region. The region is still down 30% -ish from 2021 levels, about 8,000,000 tons. And that's a little bit more than we had forecasted at the start of this year, about 1,000,000 tons.

Speaker 2

That said, that's also being offset Some of the challenges for Canadian producers off the West Coast. So our assumption today is we looked at 18,000,000 tons and The ability of the Russian Belarusian producers to get to export markets, some of that volume is coming back. That's certainly happening. But it is also true that there is a significant volume that's still challenged. And again, this year about 8,000,000 tons.

Speaker 2

We see that Volume returning to the market over the next few years, we do, but that has us completing in flight projects to the end of this year. And again, With the capability to supply that 15,500,000 tons, meet the needs of our customers, but always preserving some Flex capacity to surge tons into the market, which we've done in the past and created immense value when we do that because there continues to be this really significant uncertainty

Speaker 7

To put a few numbers to the equation, I mean, obviously, we responded quite quickly last year when we saw an unprecedented global disruption in supply. At the time We were talking about this last year. We probably saw on a run rate basis volumes out of the former Soviet Union on a run rate annualized basis were probably down about 13,000,000 tonnes. And so in that type of environment, we obviously look to quickly mobilize and understand what we could do from a supply perspective. I think one of the other things that we did see in that environment was that in a Higher than normal price environment because of the panic buying.

Speaker 7

We did see demand be temporarily impacted and we mentioned there's going to be Some period of time to rebuild back into trend levels. So I think the simplest explanation for the company is really this is an optimization of Capital deployment, how we deploy our resources and how we staff our operations, our long term belief in the fundamentals of the potash business have really not Changed, but it's really a decision on the timing of how we deploy that capital, what resources we carry at the assets and ultimately our go to market strategy hasn't changed. We've done provides us ample flexibility at least for the foreseeable near term to meet that market demand.

Speaker 2

Yes, great. So thanks, Mark. And with respect to the question about Latin America, I mean, the reality is that the Brazilian market continues to grow. It continues to be one of the most exciting markets on the planet and we have a meaningful presence there. As it relates to our plans, I'll pass it over to Jeff, but really it is about pausing on Further acquisitions as we integrate these 9 acquisitions that we have done and get our cost model and our operating model Right.

Speaker 2

Therefore, certainly in these times where we've seen this extraordinary volatility compression in crop margins and movement in interest rates. But Jeff, over to you.

Speaker 5

Yes. And Ken, I'll just reflect and echo on the comments you made. I think we've mentioned several times this morning the factors and there were several factors that led up To our impairment, volatility, much more severe volatility across the fertilizer segment and chemistry segment than we saw In North America and Australia and again the rise in interest rates were much more abrupt there as well and which led to a lot of Devaluation in inventory and such. And again, as Ken said, we still see long term we still believe in long term growth prospects For Brazil, it's expected to be the fastest growing ag market in the world. But if we look at where we are today, In the near term, we are going to pause additional investments as we really focus hard on integrating the 9 businesses that we bought Over the last 3 years, and when we say integrate, and that's from a system standpoint, that's from a standpoint of Procurement, that's the standpoint of integrating our LPI businesses into that base business.

Speaker 5

We're going to focus on driving down our cost And we're going to focus on growing our business organically as this market stabilizes. And I might add that we have seen positive signs over the last several weeks So growers back engaging into the marketplace as we go into their very heavy spring season for planting.

Speaker 3

Yes. Ben, maybe I'll just add Pedro here that Brazil is a market characterized by very long cash conversion cycles. And as we accelerate growth, we actually accelerate the investment in working capital and the carrying cost At this point in time, it's punished by the highest real interest rates in the world, which is in Brazil. So therefore, as we see now interest rates starting to abate, I mean, there was a Central Bank Brazilian Central Bank decision is ready to reduce debt in the future is uprising further reductions. It is good to wait a little bit until that becomes less punishing because otherwise we're going to be growing and all the Carrying costs and working capital is going to erode all of our margins.

Speaker 3

So that's a little bit of what's in our mind as well as we think about growth in Brazil.

Operator

Your next question comes from the line of Jacob Bout from CIBC. Your line is now open.

Speaker 8

The suspension of the clean ammonia plant in Geismar, is this just a cost issue? Maybe just talk a bit how strategically important the clean nitrogen is to Nutrien and what needs to change for further investment In that area?

Speaker 2

Yes, Jacob. The reality is that we do believe there will be an opportunity In the Amodian business, the clean Amodian business in the future, and of course, that's where we talk about marine fuel, that's where we talk about energy, hydrogen economy. But it is also true that the timing of the evolution of that demand is unknown. It's a bit in question. So we're watching that very closely and That could be something that has us return to that conversation at some point in the future.

Speaker 2

In the meantime, I think we have been fairly quite clear that we were Heading toward a final investment decision in the latter part of this year and working towards a Class III engineering cost estimate for the project. And as we did that, We did see some cost escalation through that Class III estimate, about 15% to 20%, which When we rounded up all those numbers, we came to the conclusion that at this point in time, from a capital allocation point of view and Preserving flexibility into the future, then now wasn't the time. And so while we'll continue to monitor that Those markets were clean ammonia and certainly that opportunity we came to the conclusion just the way costs were going that we'll have better opportunities For that capital, in the near term.

Operator

Your next question

Speaker 8

So your outlook For potash supply this year is nearly a 10% cut from 2021. You had a greater than that cut In global supply in 2022 and yet pricing right now is Pretty underwhelming given 2 years of that level of supply cut. What I'm wondering from you is You've just cut your expected demand for potash capacity expansions and you're halting Your project, do you have a view that the old adage of all you can skip potash One time and that's it. And that, it's not as discretionary after that. Has that changed?

Speaker 8

Do you think that the world really doesn't need 70,000,000 tons of potash on the ground? Or Are we really facing potentially some yield impacts from this? It's a bit of a head scratcher.

Speaker 2

Right. Steve, thanks for the question. And absolutely, what you're describing, we talk about extraordinary events. I think that's what you're describing here In terms of the volatility that we've seen in inventory levels and buying behaviors and that also therefore culminates in price, Our view has not changed that potash is an essential crop nutrient and that we have a lot of people to feed on this planet and That's why we talk about a return to historical trend lines growth in potash demand. So but maybe I'll hand it over to Jason, just talk about yield impacts and the agronomy side of it.

Speaker 7

Yes. Good morning, Steve. I think it's really difficult to nail down the precise yield impacts of changes in Potash application rates over time, but what we do know is where yields are at. And we know that weather has played a Pretty key role in driving yields on a global basis and in key main growing regions around the world, below trend levels over the past year. We also know that potash applications are important for They're important for the growth of the crop.

Speaker 7

And if we look at corn yields, for example, last year, we're the 2nd lowest level Versus trend in the past 20 years. And definitely could say that part of the struggle with Drought resistance over the past 2 years could be the nutrient use that's taking place. And so it's difficult to nail down The impact of potash applications and you don't know what you're losing, but we do know that yields have been below trend and definitely impacted by

Operator

Your next question comes from the line of Vincent Andrews from Morgan Stanley. Your line is now open.

Speaker 7

Thank you and good morning everyone. Wondering if you could just bridge your nitrogen expectations for the back half of the year In terms of what you're expecting 3 months ago in the prior guidance versus what you're expecting now, just given some of the changes in the market and pricing dynamics between then and now? Thanks.

Speaker 2

You bet. Thanks, Vincent. Yes, a lot of moving parts there, but I'll hand it over to Mark to just walk through how we're seeing it.

Speaker 7

So the actuals versus expectations at that point would play a part of the factor, but maybe I can just talk about what's embedded The guidance for the second half of the year as we look forward. So as Ken mentioned in his comments, we have seen very good participation on fill programs, Not only on potash, but obviously nitrogen and phosphate as well. So across the board, we were part of that. We rolled out a typical Fill program schedule in Q3, a lot of those programs took place between late June early July and we've layered in some spot tons since that time. So when you think about our ag nitrogen book for the second half, we are about 65% to 70% sold at this point as a result of those programs.

Speaker 7

So that is embedded in our guidance. And then on price, I would say that today on urea and UAN, we are above On a spot basis, what's implied at the midpoint of our guidance. But on ammonia, we do have a view that we're going to see some firming from current spot levels Into the back half of the year. So from a general price and in terms of our commitments, that's where we sit relative to our guidance.

Operator

Your next question comes from the line of Jeff Zekauskas from JPMorgan. Your line is now open.

Speaker 9

Thanks very much. A 2 part question. In the quarter, your crop chemical revenues were about flat year over year, But your gross profits were maybe down $125,000,000 and there was a similar pattern in the Q1. Can you talk about that? The second part of the question is, you say your mid cycle EBITDA is $7,000,000,000 to $7,500,000,000 And in, I don't know, May of this year, I think that's where consensus estimates were for Nutrien.

Speaker 9

And so you were trading at a mid cycle multiple on mid cycle earnings.

Speaker 2

Great. Thanks, Jeff. So maybe I'll hand it over to Jeff Tarsi to talk about crop chemistry and then we'll get on to your second question about our mid cycle assumptions.

Speaker 5

Yeah. Thanks, Jeff, and you're correct. If you look at revenue line on our crop chemistry, particularly across the first half of the year, it's about flat compared to a year ago. And keep in mind that we've seen a drastic reset in valuations across 4 Major commodity active ingredients glyphosate, glufosinate, clethodim and paraquat From a revenue standpoint, if we look at the margin side of it, we actually saw we came into the year Predicting there would be a very sizable reset of crop protection margins from a year ago. The margins we saw in 'twenty two were unprecedented Because of supply chain issues and tightness with inventory in the market.

Speaker 5

Obviously, that supply chain issues have eased up quite a bit today or much more normal. If I look at our crop protection margins in the 2nd quarter, they were 23%. And if I look back to historical crop protection margins before we saw this run up, This is slightly elevated to what we would consider normal crop protection margin. So we just brought ourselves back to a more normalized margin as it relates to That Crop Protection segment. Thanks, Jeff.

Speaker 2

And then Jeff, with respect to your second question. So earlier this year, the industry was facing this And now as we see demand stabilize and we've talked about that and looking at our new mid cycle assumptions And our growth factors within those mid cycle assumptions, it really is when we talk about potash volumes, this return to Trend line global demand grows 70,000,000 to 75,000,000 tons and our ability to supply into that 14000000 to 15000000 tons maintaining a 20% market share. We are completing a round of nitrogen brownfield expansions. Geismar will be done this year and several others over the next Couple of years, we have an assumption of 11,500,000 to 12,000,000 tons of nitrogen with operating rates of 92% to 94%. So There's opportunities to grow there.

Speaker 2

We assume some curtailments ongoing curtailments in Trinidad, but nevertheless growth in nitrogen. Then in retail, we continue to Focus on growing our Loveland Products business. We continue to focus on our supply chain. Nutrien Financial has been a growth vector for us And our digital investments as well. So we have a number of opportunities to grow this company.

Speaker 2

But importantly, as we talk about Capital allocation and maintaining flexibility there, we've also demonstrated, certainly since the inception of Nutrien over the last 5 years, Significant redistribution of cash to shareholders. If we look at what we've done, it's been a 23% reduction in the share count and a 33% increase in dividends per share. We'll continue to sustain our assets. We'll continue to high grade our investment portfolio, but we'll also continue To return significant cash to shareholders via the dividend and then opportunistically looking at share buybacks.

Operator

Your next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is now open.

Speaker 10

Yes. Thank you. Good morning, everyone. I was hoping to dig in a little more on the retail assumptions in the back half of the year and Just to make sure I'm clear on what is assumed from a market and gross margin perspective in South America That still has some higher cost inventory to work through. What is assumed from a sell through perspective on the crop chem side, Especially as you think about producer rebate programs that I imagine won't be hit given what the sales of many of the crop chem producers have looked like in the second quarter.

Speaker 10

And just the implications that that would have as we think about moving into 'twenty four outside of some of the margin noise you experienced this year?

Speaker 2

Thanks for the question, Adam. I'll hand it over to Jeff Tursey.

Speaker 5

Yes. If we deal with the question around the 2nd half of the year, look, the majority the greatest majority of anything we would have pulled back in the second half of the year As around the notion of continued softness in the Latin American market, there is still some high price inventory because growers Buying patterns change there over the last 12 to 14 months. We're carrying and I think most of the industry is carrying more inventory into the spring side season and they want to, so we got to work through that. So that's where the majority of any pullback we have. We also factored in a bit of weather Into our assumptions for the second half of the year as well, as you would know July would have been the hottest month on record, I think across North America is very key stage of crop maturity and such, especially as it relates to corn.

Speaker 5

So we kind of factored in some things how that might Fungicide and insecticide applications and such. But we also if I look at the back half, I also look at the fact that this crop is maturing Very rapidly right now. And I think that leads to a very the possibility of a very open fall in North America. And so We're expecting some we're expecting heavy application. We think growers will find pricing on MP and K very attractive for the fall As well, as I think you asked the question, is it related to suppliers and inventory?

Speaker 5

And look, we've worked hard to bring our inventory down. I think most of the industry has been in a strategy of destocking, whether it's on the nutrients or whether it's on crop protection. And from a crop protection that we ended the month of June, down on our crop protection inventory year over year, We expect that to look even better as we get through the Q3 and we get through fungicide and insecticide applications. As it relates To purchases for the remainder of the year, I think I mentioned earlier that the supply constraints have eased considerably Over the last 12 months, and I don't see it that a lot of people are in a mood to add a lot of inventory in the back half of the year As it relates to crop protection, so we'll have to let the rest of the season play out. But I know that kind of be the frame of mind we would be in right now and I don't think it would be different And much of the industry.

Operator

Your next question comes from the Richard Verchitorena from Wells Fargo. Your line is now open.

Speaker 6

Great. Thank you. Just wanted to Circle back on the Geismar plant deferral. Just wanted to make sure that in terms of the plant economics, this is probably more A function of timing as to when demand returns or is it overall cash cost that's increased, so it's not Economically attractive? Because I would have thought the IRA bill would have provided some support for that.

Speaker 6

And then also just to follow-up, Is there interest from potential partners or maybe JVs that could potentially move this project forward? Thank you.

Speaker 2

Thanks for the question, Richard. And it is the combination of The evolution of those end markets, our view of capital and costs today and looking at our capital allocation priorities in the near to medium term And creating that flexibility that we talked about earlier. But I'll hand it over to Trevor Williams, our President of our nitrogen business and then Mark to provide a bit Color?

Speaker 11

Yes. So thanks for the question. And a couple of comments. Obviously, the IRA in the Q45 have been a big Improvements in terms of being able to try and justify some of these projects. However, if we look at an overall perspective in terms of the IRR that was built in when we look at our capital allocation decisions.

Speaker 11

So really at this point, while that is obviously a bit of a tailwind or improvement, it really didn't get us over the hurdle in terms of the economics of the project at this point. The second part is a great question and that's something that we'll continue to do. We'll talk with our partners both on the technology side As well as on the downstream side and evaluate opportunities. But at this point, we really look at the delay probably being at least a minimum of 24 months. But To your point, we would continue to look at opportunities from a partnership perspective going forward.

Speaker 11

Mark?

Speaker 7

Yes. I think Ken and Trevor covered it pretty well, Richard. I mean, what I'd say from an economic standpoint is that Trevor did mention earlier and Ken that We did see some capital cost escalation relative to our original expectations and obviously that's something that deteriorated the economics somewhat. And then I think obviously a lot hinges on the view of the future. And as Ken said, over the long term, we do have confidence that These new sources of demand related to clean ammonia have a number of reasons why they should emerge.

Speaker 7

But today, the evidence wouldn't be sufficient to justify the assumption of a Premium, at least not in the near term emerging for clean ammonia. So on the commercial side of things, we did an exceptional amount of work in terms of market development, Talking to partners and as Ken mentioned, we do see a day where this could potentially become more attractive and really the attitude at point is to preserve value and optionality for the project and really just making a decision that there are higher return, better capital allocation alternatives Over the near term and possibly medium term, but the option to revisit this at a later point.

Operator

Your next question comes from the line of Michael Tupholme from TD Securities. Your line is now open.

Speaker 12

Question on the potash side. Can you provide an update on the production curtailments you announced last month at Quarry and Rocanville and What you're assuming in terms of bringing that production back online? And then as a follow on, can you also provide an update on the status of the equipment issue at the Portland terminal and when you expect that terminal to be back up?

Speaker 2

Great. Yes, absolutely. With respect to the curtailments, yes, we've talked about those and talked about Some reduced potash volumes are related to the challenges on the West Coast and hence having to bring down some production. But Chris I'll hand it over to Chris to talk about the curtailments and then with respect to Portland and how we how that's evolving in terms of getting that back in service over to Mark. So Chris?

Speaker 13

Yes. Good morning, Michael. Thanks for the question. And yes, you're right. We did we're forced to curtail production at both our quarry And Rokonville sites.

Speaker 13

And the plan as it stands today is that we're hopeful that the strike is resolved here formally by the end of the week In Vancouver, and that would enable us to bring Rokenville back to normal production rates. But our plan at the moment is to keep Corey, a little curtailed. But if demand was to move up towards the end of the year, we could also Remove that and bring some production back if the market needed it. So but that's our plan as it stands today. And regarding the West Coast ports, I'll hand it over to Mark.

Speaker 7

Sure. Thanks, Michael. So look, I'll start with Portland, but maybe just for completeness, Talk about Neptune as well, given that's all part of the picture on logistics constraints and your questions on potash production to Chris. So from a Portland perspective, Repairs are progressing at the facility and what we hear from Canpotex is that we do expect completion of that work in Portland to be back in service by The end of Q4. From a Neptune standpoint, as Chris said, we're hopeful we see resolution in the next few days and a definitive answer that there will be no more strike action there.

Speaker 7

Today at Neptune, labor and productivity as we hear is about normal, but there is a meaningful backlog that exists from the 2 weeks or so of strike action that did happen. Canpotex does have numerous loaded trains at 3rd party sites and producer sites Sitting in Western Canada that do need to be worked through. So there is a backlog and some time it's going to take. And right now, we assume that

Operator

Your next question comes from the line of Josh Spector from UBS. Your line is now open.

Speaker 7

Yes.

Speaker 14

Hi. Thanks for taking my questions. I guess two quick ones for me, if I can. First, just to clarify on the Geismar clean ammonia facility. So I believe you had a letter of intent for some offtake of that.

Speaker 14

Did that partner change any of their willingness or timeline To take any of that product into that play, is your decision at all? And then just second, with CapEx, I think Pedro, you mentioned $2,500,000,000 to $3,000,000,000 of the range which you'd operate in, but you're still spending about $1,000,000,000 on growth this year. So could we see a number closer to $2,000,000,000 next year? Is that not realistic? Thanks.

Speaker 2

Great. Thanks, Josh. Yes, with respect to the offtake and Letter of intent there. No, no, that was not part of the decision making process. That was with Mitsubishi.

Speaker 2

We have a very strong relationship with Mitsubishi. Issue that continues, but that was not part of the decision making process. It really does boil down to the things that we talked about earlier, Evolution of end markets, increasing capital costs and better uses for capital in the near to medium term and wanting to maintain flexibility With disciplined capital allocation in near to medium term. With respect to the CapEx assumptions, I'll hand it over to Pedro.

Speaker 3

Yes. I think, Josh, I think just to clarify, our $2,500,000,000 to $3,000,000,000 is what we will be saving And the both the ramp and the Geismar project into the future. So those are capital expenditures that will not happen. That would have been in our 5 year plan for the next 5 years. So in addition to that, we are looking at other Potential actions in our capital plan for this year and next year, but I just wanted to make sure I clarify that.

Operator

Your next question comes from the line of Edlain Rodriguez from Credit Your line is now open.

Speaker 15

Thank you. Good morning, everyone. Just one quick question on India, and maybe this is for Mark. Like what are you seeing in India in terms of potash? Like are they really paying $4.22 versus a $3.07 For China, like are they actually buying and paying that price?

Speaker 2

Thanks for the question, Edlain. We're We're not seeing volumes move at the agreed 4.22, but also you may have seen the Capitex pulled offers in India as a result of the Challenges off the West Coast, but Mark, do you want to provide more color?

Speaker 7

Yes. Good morning, Edlain. So upon the Signing of the India contract at $4.22 I think right at the beginning of the 2nd quarter, we did see some Canpotex shipments go into India and we understand from other producers at that $4.22 Price level, but subsequent to the signing of the Chinese contract, we have not seen meaningful volumes, at least from a Canpotex standpoint going to India. And again, we can't speak for other suppliers, but as of now, there's no new agreement with Canpotex in India. As Ken said, Capitec's pulled all of its offers following the disruption at the Neptune terminal and really looking at the overall Folio of tonnes available for the last half of the year, looking at the cost impacts from the outage and really assessing where the best netbacks are.

Speaker 7

So it remains to be seen how the rest of the year evolves for India. We do know that because of the better than expected Soon, we would expect there is going to be demand for potash in India and that India will need more potash for the remainder of the year.

Operator

Your next question comes from the line of Aaron Cecirelli from Berenberg. Your line is now

Speaker 16

Hi, good morning. Just a follow-up on India. How confident are you now with this India contract expiring But this is not going to translate into a pause in the price recovery we see now in potash prices.

Speaker 2

Yes. Thanks for the question, Aaron. And yes, really looking at the region and standard grade, I mean, Obviously, the China contract had the effect of creating the stability in the market, and that was reflected really even almost Immediately Brazil bouncing off that floor and now strengthening, as we talked about earlier, 10% since June. And that market So affordability has gone up and inventory levels being drawn down that we expect movements in Southeast Asia. And in India, inventories are very low, as Mark just said.

Speaker 2

So Heading to the fall here at Strong Monsoon, we do expect demand in India. It's always subject to the discussion about the subsidy in India, But we expect inventory replenishment in India as well. The India has been a case of demand rationalization because With some of these supply challenges over the last 18 months, simply not getting the volume, but a question earlier About yield impacts, I mean India is a place where we could see yield impacts if some of these challenges persist.

Operator

There are no further questions at this time. I will now hand over to Jeff. Please continue.

Speaker 1

All right. Thank you for joining us today. The Investor Relations team is available for follow-up questions. Have a great day.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Nutrien Q2 2023
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